How to identity a bubble

Someone asked, "How to identify a bubble?"

The answer: "Nobody knows". Alan Greenspan, the former chairman of the US Federal Reserve Board said that one knows a bubble after it has burst. This is not helpful. It turned out to be disastrous, as the bursting of the US housing bubble has led to the global financial crisis.

Is there a rule of thumb to identify a bubble? Nobody has dared to stick out his thumb. But I shall try.

You get a bubble when the current price is 50% or 100% higher than the average price for the past 5 years. Maybe, we should look at the actual statistics and see if 50% or 100% is a better indicator.

For example, the average oil price during the past 5 years prior to 2008 must be around US$40. When it exceeded US$80, it was a bubble. After it burst, it returned to US$40.

When the high end property prices in Singapore doubled in value in 2008 compared to the past years, it was a bubble. It burst soon after.


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